Wednesday, November 30, 2016

Employment Going South. Literally: From 1990 to 2015, the US economy as a whole increased employment by about 30 million (30,056,664 according to the BLS). Employment in 1990 was 118,900,000, so that meant that there was a roughly 25% increase in employment over that 25 year period, with a little more than 1 million jobs added per year, on average.

I’m not going to surprise anyone by saying that these 30 million jobs were not spread equally across the entire US. What I didn’t have a good sense of, personally, was how disparate the change in employment was across the US. This post is just some documentation about the absolute size of the change in job distribution across the US. ...

[analysis, graphs]

... Again, I’m not claiming that this is some kind of revelation here. The movement of population, and hence jobs, from the Northeast/Midwest to the Sunbelt is well known. What I found interesting was putting some tangible numbers of the shift. The little counter-factual I’m doing here is not very rigorous; there is no particular reason to believe that the 1990 distribution is the “right” distribution of jobs to compare against. But the 1990 distribution does have the feature of being prior to NAFTA and prior to China’s accession to the WTO, both of which are at times cited as sources of manufacturing job losses in the upper Midwest and Northeast.

The scale of the relative job changes, though, indicates that more of the losses have to do with free trade within the US than free trade outside of the US. The areas with relative decline lost 13 million jobs compared to the 1990 distribution of jobs. In total the US shed 6 million manufacturing jobs from 1990 to 2015 (18 million to 12 million, roughly). So this relative decline cannot possibly be a function only of manufacturing and international trade in manufactured goods. There is just too much relative movement out of the declining counties to attribute to this. This is a sloppy way of thinking about how this would work counter-factually (I’m ignoring spillovers entirely), but if you magically added 6 million extra jobs to those counties in relative decline, they would still be in relative decline compared to the Sunbelt in terms of jobs. They’d have 84.4 million jobs (as opposed to 78.4 million), but you’d expect them to have 95.6 million based on the 1990 distribution, so they would still be 11.2 million jobs off the pace.

The breadth of relative loss, though, seems striking, and is the one thing I did not appreciate prior to looking at this data. 909 counties lost jobs in absolute terms, which is 29% of all counties. Another 1,279 counties, 41% of all counties, gained jobs in absolute terms buy lost in relative terms. 944 counties, 30%, gained in relative terms. Just as many counties gained in relative terms as lost in absolute terms. The winning locations - Houston, Dallas, Atlanta, Miami, Phoenix, Denver, Vegas - won big, but the losing was spread across a wide area.

More jobs in 2015 are still located in places in relative decline (78.4 million) than are in places in relative ascent (70.5 million). Of those 78.4 million, 18 million (or about 12% of jobs) are in counties that experienced absolute job losses over the last 25 years. Most jobs are still in places that look to be losing out to Sunbelt cities over time. To the extent that your local economy plays a role in forming your opinions, this seems relevant, although I am going to stop now before I try to do any amateur political science or sociology.

Discussions about increasing outlays on infrastructure frequently include claims about the positive impact these programs would have on employment and wages, often referring to the fiscal policy “multiplier.” For example, it’s often claimed that government spending on infrastructure has a multiplier between 1.5 and 2.

Does this mean we should expect a significant increase in employment and income if the government undertakes major new investment in the nation’s infrastructure? Let’s take a closer look. ...

One tax policy Americans yugely favor, The Hill: Nobody likes taxes, but roughly nine out of 10 Americans want income from investments to be taxed at least as much as other income. Republican leaders, tone-deaf,... close their eyes to a reform enacted under President Ronald Reagan: equal taxes on capital gains, dividends, and ordinary income such as wages. It’s one policy the country would love to have back, yugely. ...

The landslide national preference for at least equal taxes on investments—for tax fairness, not tax breaks—meshes perfectly with the populist belief that the system is rigged in favor of the rich. ... According to an analysis by the non-partisan Tax Policy Center, the top 1 percent of Americans receives over 62 percent of the benefits from lower rates on capital gains, dividends and related tax preferences; for the top 10 percent, the total benefit share is just short of 80 percent.

That’s more than alright with Republicans, whose tax plans will likely drive those percentages even higher—in exactly the opposite direction of the reform ushered in a generation ago by President Reagan. He took Main Street’s side on taxing Wall Street gains, but the GOP likes to pretend it never happened. ...

Donald Trump rode the populist tide all the way to the White House. Let’s see if President Trump listens to the populist yearning—the yuge populist yearning—for equal taxes on income from wealth and income from work.

Let's turn to longer-run challenges, and start by asking why growth has been so slow, and how fast we are likely to grow going forward. This next slide shows the five-year trailing average annual real GDP growth rate (figure 8). By this measure, growth averaged about 3.2 percent annually through the 1970s, the 1980s, and the 1990s. But growth began to decline after 2000 and then nose-dived with the onset of the Global Financial Crisis in 2007 and the slow expansion that followed. Since the financial crisis ended in 2009, forecasters have gradually reduced their estimates of long-run trend growth from about 3 percent to about 2 percent--a seemingly small difference that would make a huge difference in living standards over time.3

How much of this decline is just a particularly bad business cycle, and how much represents a long-run downshift? To get at that question, let's take a deeper look at the growth slowdown. We can think of economic growth as coming from two sources: more hours worked (labor supply) or higher output per hour (productivity). Hours worked mainly depends on growth in the labor force, which has been slowing since the mid-2000s as the baby-boom generation ages. As you can see, the labor force is now growing at only about 0.5 percent per year (figure 9). Another way to see this is through the sustained increase in the ratio of people over 65 to those who are in their prime working years (figure 10). This long-expected demographic fact has now arrived, and it has challenging implications for our potential growth and also for our fiscal policy.4

The unexpected part of the growth slowdown reflects weak productivity growth rather than lower labor supply. Labor productivity has increased only 1/2 percent per year since 2010--the smallest five-year rate of increase since World War II and about one-fourth of the average postwar rate (figure 11). The slowdown in productivity has been worldwide and is evident even in countries that were little affected by the crisis (figure 12). Given the global nature of the phenomenon, it is unlikely that U.S.-specific factors are mainly responsible.

A portion of the productivity slowdown is undoubtedly due to low levels of investment by businesses. The financial crisis and the Great Recession left firms with excess capacity, reducing incentives to invest. If businesses expect slower growth to continue, that will also hold down investment.

The other important factor is the decline in what economists call total factor productivity, or TFP, which is the part of productivity that is not explained by capital investment or increases in the skills of the labor force. TFP is thought to be mainly a function of technological innovation and efficiency gains.

There is no consensus about the future direction of productivity.5 The pessimists argue that the big paradigm-changing innovations, such as electrification or the advent of computers, are behind us. If that is so, then our standard of living will increase more slowly going forward. The optimists think that this slowdown is only a passing phase and that the age of robots and machine learning will transform our economy in coming decades. Still others argue that we are currently underestimating productivity and output because of the real difficulties we face in measuring GDP in a modern economy. For example, how do we measure the value-added of free digital services like Facebook or Twitter?6

The future is, as always, uncertain. But I would sum up the growth discussion as follows. Growth in the labor force has slowed, and we can estimate it with reasonable confidence to be only about 0.5 percent. Growth in productivity is both more important and much harder to predict. Productivity varies significantly over time, as figure 11 showed. If productivity growth returns to, say, 1.5 percent, then the U.S. economy could grow at about 2.0 percent over the long term. Actual growth may turn out to be weaker or stronger, and the choices we make as a society will have something to say about that.

Why Are Long-Term Interest Rates So Low?

Let's turn to the related question of why long-term interest rates are so extraordinarily low in advanced economies around the world. The yield on our own benchmark 10-year U.S. Treasury security has increased lately, but at 2.3 percent it is still far below what was normal before the financial crisis. In fact, this next chart shows that, as growth and inflation have fallen, longer term interest rates have fallen as well over the past 35 years (figure 13).

So why are long-term interest rates so low? Many of you will no doubt be thinking, "They are low because you people at the Fed set them low!" While there is an element of truth there, that is not the whole story. The FOMC has considerable control over short-term interest rates. We have much less influence over long-term rates, which are set in the marketplace. Long-term interest rates represent the price that balances the supply of saving by lenders and demand for funds by borrowers, such as businesses needing to fund their capital expenditures. Lenders expect to receive a real return and to be compensated for inflation and for the risk of nonpayment. Meanwhile, borrowers adjust their demand for funds based on their changing assessment of the risks and expected returns of their investment projects. When desired saving rises or investment demand falls, then long-term interest rates will decline. Today's very low level of long-term rates suggests that both of these factors are at play.

Both expectations of slower growth and the aging of our population are having significant effects on desired saving and investment and are thus important causes of lower interest rates. If the economy is expanding more slowly, then the level of investment needed to meet demand will be lower. The lower path of growth reduces future income prospects of households, and they will tend to raise their saving. The pending retirement of baby boomers means higher saving, because people tend to save the most in the years just before their retirement. In addition, the lower rate of return on capital owing to lower productivity growth will lead to less investment and lower interest rates.

As with productivity, the factors behind the fall in U.S. interest rates include an important global component, as rates are low around the world. Indeed, although our rates are near historical lows, U.S. Treasury rates are among the highest among the major advanced economy sovereigns (figure 14).

Is This the New Normal?

What can we do to prevent low growth, low inflation, and low interest rates from becoming the new normal? We need to focus on ways to increase our long-term growth and spread that prosperity as broadly as possible. I hasten to add that these policies are, for the most part, outside the purview of the Federal Reserve. We need policies that support productivity growth, business hiring and investment, labor force participation, and the development of skills. We need effective fiscal and regulatory policies that inspire public confidence. Increased spending on public infrastructure may raise private-sector productivity over time, particularly with the growth of the stock of public infrastructure near an all-time low.7 Greater support for public and private research and development, and policies that improve product and labor market dynamism may also be fruitful.8 Monetary policy can contribute by supporting a strong and durable expansion in a context of price stability.

Monetary Policy The low interest rate environment presents special challenges for monetary policy. In setting our target for the federal funds rate, a good place to start is to identify the rate that would prevail if the economy were at 2 percent inflation and full employment--the so-called neutral rate. "Neutral" in this context means that the rate is neither contractionary nor expansionary. If the fed funds rate is lower than the neutral rate, then policy is stimulative or accommodative, which will tend to raise growth and inflation. If the fed funds rate is higher than the neutral rate, then policy is tight and will tend to slow growth and reduce inflation.

But we can only estimate the neutral rate, and those estimates are subject to substantial uncertainty. Before the crisis, the long-run neutral rate was generally thought to be roughly stable at around 4.25 percent. Since the crisis, estimates have steadily declined, and the median estimate by FOMC participants stood at 2.9 percent in September. Many analysts believe that the neutral rate is even lower than that today and will only return to its long-run value over time.9 The low level of the neutral interest rate has several important implications. First, today's low rates are not as stimulative as they seem--consider that, despite historically low rates, inflation has run consistently below target and housing construction remains far below pre-crisis levels. Second, with rates so low, central banks are not well positioned to counteract a renewed bout of weakness. Third, persistently low interest rates can raise financial stability concerns. A long period of very low interest rates could lead to excessive risk-taking and, over time, to unsustainably high asset prices and credit growth. These are risks that we monitor carefully. Higher growth would increase the neutral rate and help address these issues.

Turning to the outlook for monetary policy, incoming data show an economy that is growing at a healthy pace, with solid payroll job gains and inflation gradually moving up to 2 percent. In my view, the case for an increase in the federal funds rate has clearly strengthened since our previous meeting earlier this month. Of course, the path of rates will depend on the path of the economy. With inflation below target, relatively slow growth, and some slack remaining in the economy, the Committee has been patient about raising rates. That patience has paid dividends. But moving too slowly could eventually mean that the Committee would have to tighten policy abruptly to avoid overshooting our goals.

Conclusion To wrap up, since the end of the Great Recession in 2009, our economy has recovered slowly but steadily. Today, we are reasonably close to achieving full employment and our 2 percent inflation objective. But we face real challenges over the medium and longer terms. Our aging population will mean slower growth, all else held equal. If living standards are to continue to rise, we need policies that will support productivity and allow our dynamic economy to generate widespread gains in prosperity.

Currency Authority Proposes Ban on Bank Investments in Commercial Metals: In addition to typical banking activities such as issuing home loans and administering savings accounts, should your neighborhood bank be able to buy and trade metals like copper and gold? Presently, financial institutions can legally participate in commodities markets—which include trading in these precious metals—creating a state of affairs that some regulators and politicians say may increase commodities prices for consumers and create financial instability. ...

The Office of the Comptroller of the Currency, which regulates and supervises national banks and federal savings associations, recently ... proposed [a] rule that would prohibit banking institutions from buying or selling metals including copper, aluminum, and gold. ...

Designating dealing in certain commercial metals as an out-of-bounds activity for commercial banks marks a reversal of position for the Currency Comptroller. It previously issued an interpretive letter stating that national banks could buy and sell copper—an industrial metal—because such trading was functionally equivalent to trading in precious metals like gold—an activity considered within the “business of banking.”

As indicated by the proposed rule, the Comptroller no longer believes that investing in copper markets is principally the same as dealing with coins made from precious metal or other types of gold. ...

The Comptroller’s proposed rule comes on the heels of a report it co-authored with the Federal Reserve and Federal Deposit Insurance Corporation, which contains several recommendations to ensure the separation of traditional banking activities from more commercial activities. The report specifically states that the Comptroller would publish a proposed rule about limits on trading copper.

In the report, the Federal Reserve also recommends several other reforms that aim to “help ensure the separation of banking and commerce.” It proposes repealing a rule that allows bank holding companies to participate in commodities activities similar to those addressed by the Comptroller’s proposed rule for national banks and recommends strengthening standards for other commodity-related activities like trading derivatives. The report’s authors also recommend repealing authority for financial holding companies to participate in merchant banking activities like buying a stake of ownership in a company instead of providing a traditional loan.

The Comptroller’s proposed rule is part of a growing trend of regulatory and political pressure to separate traditional banking activity from commercial activity. ...

But I am puzzled that they ... are upgrading their estimates of fiscal policy multipliers (in particular for tax cuts) at the wrong time in the business cycle, when the economy must be closer to full employment.

Here is the history: back in 2011 many advanced economies switched to contractionary fiscal policy at a time where their growth rates were low and unemployment rates remained very high. During those years the OECD seemed be ok with fiscal consolidation given the high government debt levels (consolidation was necessary). They understood that there were some negative effects on demand but as they assumed multipliers or about 0.5 (in the middle of a crisis with very high unemployment rates!) the cost did not seem that high.

Today, in an economy with unemployment rate below 5%, and wages and inflation slowly returning to normal values and a central bank ready to raise interest rate, the OECD turns around and decides to change the fiscal policy multipliers to something close to 1 even if the announced fiscal measures consists mostly of tax cuts to the wealthier households with low propensity to consume.

This is what I would call a procyclical revision of fiscal policy multipliers. Encourage consolidations in the middle of a crisis and expansion in good times. Not quite what optimal fiscal policy should look like.

And, of course, the media (including the Financial Times) reported on the OECD study as a validation of the new US administration policies.

And I leave for another (longer) post the absence of any serious discussion of the risks associated to a Trump presidency. This is coming from an organization that has been obsessed with the risks of inflation and excessive asset appreciation during the crisis.

Monday, November 28, 2016

Immigrants and Firms' Outcomes: Evidence from France, by Cristina Mitaritonna, Gianluca Orefice, and Giovanni Peri, NBER Working Paper No. 22852 Issued in November 2016: In this paper we analyze the impact of an increase in the local supply of immigrants on firms’ outcomes, allowing for heterogeneous effects across firms according to their initial productivity. Using micro-level data on French manufacturing firms spanning the period 1995-2005, we show that a supply-driven increase in the share of foreign-born workers in a French department (a small geographic area) increased the total factor productivity of firms in that department. Immigrants were prevalently highly educated and this effect is consistent with a positive complementarity and spillover effects from their skills. We also find this effect to be significantly stronger for firms with low initial productivity and small size. The positive productivity effect of immigrants was also associated with faster growth of capital, larger exports and higher wages for natives. Highly skilled natives were pushed towards firms that did not hire too many immigrants spreading positive productivity effects to those firms too. Because of stronger effects on smaller and initially less productive firms, the aggregate effects of immigrants at the department level on average productivity and employment was small.

Why Corruption Matters, by Paul Krugman, NY Times: Remember all the news reports suggesting, without evidence, that the Clinton Foundation’s fund-raising created conflicts of interest? Well, now the man who benefited from all that innuendo is ... giving us an object lesson in what real conflicts of interest look like as authoritarian governments around the world shower favors on his business empire. ...

And his early appointments suggest that he won’t be the only player using political power to build personal wealth. ... America has just entered an era of unprecedented corruption at the top. ...

Normally, policy reflects some combination of practicality — what works? — and ideology — what fits my preconceptions? And our usual complaint is that ideology all too often overrules the evidence.

But now we’re going to see a third factor powerfully at work: What policies can officials, very much including the man at the top, personally monetize? And the effect will be disastrous. ...

But what’s truly scary is the potential impact of corruption on foreign policy. Again, foreign governments are already trying to buy influence by adding to Mr. Trump’s personal wealth, and he is welcoming their efforts.

In case you’re wondering, yes, this is illegal, in fact unconstitutional, a clear violation of the emoluments clause. But who’s going to enforce the Constitution? Republicans in Congress? Don’t be silly.

Destruction of democratic norms aside, however, think about the tilt this de facto bribery will give to U.S. policy. What kind of regime can buy influence by enriching the president and his friends? The answer is, only a government that doesn’t adhere to the rule of law.

Think about it: Could Britain or Canada curry favor with the incoming administration by waiving regulations to promote Trump golf courses or directing business to Trump hotels? No — those nations have free presses, independent courts, and rules designed to prevent exactly that kind of improper behavior. On the other hand, someplace like Vladimir Putin’s Russia can easily funnel vast sums to the man at the top in return for, say, the withdrawal of security guarantees for the Baltic States.

One would like to hope that national security officials are explaining to Mr. Trump just how destructive it would be to let business considerations drive foreign policy. But reports say that Mr. Trump has barely met with those officials, refusing to get the briefings that are normal for a president-elect.

So how bad will the effects of Trump-era corruption be? The best guess is, worse than you can possibly imagine.

Sunday, November 27, 2016

A secular religion that lasted one century: The death of Fidel Castro made me think again of the idea that I had for a while about our lack of understanding of what is the place of communism in global history of mankind. We have thousands of historical volumes on communism, and similarly thousands of volumes of apologia and critiques of Communism, but we have no conception of what its position in global history was—e.g. whether colonialism would have ended without communism, whether communism kept capitalism less unequal, whether it promoted social mobility, or made transition from agrarian to industrial societies in Asia much faster etc. As Diego Castaneda mentioned in today’s tweet, we probably will not be able to assess communism for a while, probably until the passions that it arose have died down.

The death of Fidel Castro is a useful marker because he was the last canonic communist revolutionary: the leader of a revolution that overthrew the previous order of things, nationalized property, and ruled through a single party-state. We can pretty confidently state that no communist revolutionary in that canonic mould that was so common in the 20th century, from Lenin, Trotsky, Stalin, Mao, Liu Shaoqi, Tito and Fidel will arise in this century. The ideas of nationalized property and central planning are dead. In a very symmetrical way, the arrival of Utopia to power that began in glacial Petrograd in November 1917 ended with the death of its last actual, physical, proponent, in a far-away Caribbean nation, in November 2016.

Let me go over some grossly simplified ideas that, perhaps one day, I will expound more fully in a book format. ...

...Earnings mobility for children from the very broad middle—parents whose income ranges from the bottom 10 percent all the way to the cusp of the top 10 percent—is not tied strongly to family income. These children tend to move up or down the income distribution without regard to their starting point in life. This may be one element of insecurity among the middle class: in spite of their best efforts, their children may be as likely to lose ground and fall in the income distribution as they are to rise.

The situation is very different for children raised by top-earning parents...

The only way to make sense of what happened is to see the vote as an expression of, well, identity politics — some combination of white resentment at what voters see as favoritism toward nonwhites (even though it isn’t) and anger on the part of the less educated at liberal elites whom they imagine look down on them.

“You know, to just be grossly generalistic, you could put half of Trump’s supporters into what I call the basket of deplorables. Right?” she said to applause and laughter. “The racist, sexist, homophobic, xenophobic, Islamaphobic — you name it. And unfortunately there are people like that. And he has lifted them up.”

Clinton effectively wrote off nearly half the country at that point. Where was the liberal outrage at this gross generalization? Nowhere – because Clinton’s supporters believed this to be largely true. The white working class had already been written off. Hence the applause and laughter.

In hindsight, I wonder if the election was probably over right then and there.

Krugman continues:

In particular, I don’t know why imagined liberal disdain inspires so much more anger than the very real disdain of conservatives who see the poverty of places like eastern Kentucky as a sign of the personal and moral inadequacy of their residents.

But they do know the disdain of conservatives. Clinton followed right along the path of former Presidential candidate Mitt Romney:

It was the characterization of “half of Trump’s supporters” on Friday that struck some Republicans as similar to the damning “47 percent” remark made by their own nominee, Mitt Romney, in his 2012 campaign against President Obama. At a private fund-raiser Mr. Romney, who Democrats had already sought to portray as a cold corporate titan, said 47 percent of voters were “dependent upon government, who believe that they are victims” and who “pay no income tax.”

Krugman forgets that Trump was not the choice of mainstream Republicans. Trump’s base overthrew the mainstream – they felt the disdain of mainstream Republicans just as they felt the disdain of the Democrats, and returned the favor.

I doubt very much that these voters are looking for the left’s paternalistic attitude:

One thing is clear, however: Democrats have to figure out why the white working class just voted overwhelmingly against its own economic interests, not pretend that a bit more populism would solve the problem.

That Krugman can wonder at the source of the disdain felt toward the liberal elite while lecturing Trump’s voters on their own self-interest is really quite remarkable.

I don’t know that the white working class voted against their economic interest. I don’t pretend that I can define their preferences with such accuracy. Maybe they did. But the working class may reasonably believe that neither party offers them an economic solution. The Republicans are the party of the rich; the Democrats are the party of the rich and poor. Those in between have no place.

That sense of hopelessness would be justifiably acute in rural areas. Economic development is hard work in the best of circumstances; across the sparsely populated vastness of rural America, it is virtually impossible. The victories are – and will continue to be – few and far between.

The tough reality of economic development is that it will always be easier to move people to jobs than the jobs to people. Which is akin to telling many, many voters the only way possible way they can live an even modest lifestyle is to abandon their roots for the uniformity of urban life. They must sacrifice their identities to survive. You will be assimilated. Resistance is futile. Follow the Brooklyn hipsters to the Promised Land.

This is a bitter pill for many to swallow. To just sit back and accept the collapse of your communities. And I suspect the white working class resents being told to swallow that pill when the Democrats eagerly celebrate the identities of everyone else.

And it is an especially difficult pill given that the decline was forced upon the white working class; it was not a choice of their own making. The tsunami of globalization washed over them with nary a concern on the part of the political class. To be sure, in many ways it was inevitable, just as was the march of technology that had been eating away at manufacturing jobs for decades. But the damage was intensified by trade deals that lacked sufficient redistributive policies. And to add insult to injury, the speed of decline was hastened further by the refusal of the US Treasury to express concern about currency manipulation twenty years ago. Then came the housing crash and the ensuing humiliation of the foreclosure crisis.

The subsequent impact on the white working class – the poverty, the opioid epidemic, the rising death rates – are well documented. An environment that serves as fertile breeding ground for resentment, hatred and racism, a desire to strike back at someone, anyone, simply to feel some control, to be recognized. Hence Trump.

Is there a way forward for Democrats? One strategy is to do nothing and hope that the fast growing Sunbelt shifts the electoral map in their favor. Not entirely unreasonable. Maybe even the white working class turns on Trump when it becomes evident that he has no better plan for the white working class than anyone else (then again maybe he skates by with a few small but high profile wins). But who do they turn to next?

And how long will a "hold the course" strategy take? One more election cycle? Or ten? How much damage to our institutions will occur as a result? Can the Democrats afford the time? Or should they find a new standard bearer that can win the Sunbelt states and bridge the divide with the white working class? I tend to think the latter strategy has the higher likelihood of success. But to pursue such a strategy, the liberal elite might find it necessary to learn some humility. Lecturing the white working class on their own self-interest hasn’t worked in the past, and I don’t see how it will work in the future.

Friday, November 25, 2016

America is not always like the rest of the world: Macroeconomists like to use US data to test and develop theories- the coverage is generally very good, and the world’s largest economy is an obvious benchmark. But what if the US happens to be very atypical in some respects? For example the evolution of the income distribution…

Using the dataset collated by Nolan et al and OECD data, I calculated the growth in real median incomes vs real GDP per capita from about 1980 to 2010. If the two had grown at the same rate, the bar would be 100%- In fact, median post-tax US income only grew by about a quarter of the pace that real GDP per head did- quite unlike other countries. Some of this might reflect measurement, reporting or data compilation issues, since GDP figures are compiled from different raw data to the household income measures. Indeed the difference looks less stark when you use growth in the mean income as the yardstick (the dots).

But when you delve deeper into household incomes, the US still looks quite different. As before, the darker dots show the evolution of the median income relative to the mean. The lighter dots show what happened at other percentiles. We see that the bottom half of the distribution had much slower relative growth in the US than elsewhere.

So when thinking about causes or consequences of changes to the US income distribution, we should remember that the US may be atypical and these insights may not carry over to other countries.

Recently Bernie Sanders offered an answer: Democrats should “go beyond identity politics.” What’s needed, he said, are candidates who understand that working-class incomes are down, who will “stand up to Wall Street, to the insurance companies, to the drug companies, to the fossil fuel industry.”

But is there any reason to believe that this would work? Let me offer some reasons for doubt. ...

Any claim that changed policy positions will win elections assumes that the public will hear about those positions. How is that supposed to happen, when most of the news media simply refuse to cover policy substance? ...

Beyond this, the fact is that Democrats have already been pursuing policies that are much better for the white working class... Yet this has brought no political reward. ...

Now, you might say that health insurance is one thing, but what people want are good jobs. Eastern Kentucky used to be coal country, and Mr. Trump, unlike Mrs. Clinton, promised to bring the coal jobs back. ... But it’s a nonsensical promise..., there may be a backlash when the coal and manufacturing jobs don’t come back, while health insurance disappears.

But maybe not. Maybe a Trump administration can keep its supporters on board, not by improving their lives, but by feeding their sense of resentment.

For let’s be serious here: You can’t explain the votes of places like Clay County as a response to disagreements about trade policy. The only way to make sense of what happened is to see the vote as an expression of, well, identity politics — some combination of white resentment at what voters see as favoritism toward nonwhites (even though it isn’t) and anger ... at liberal elites whom they imagine look down on them.

To be honest, I don’t fully understand this resentment. In particular, I don’t know why imagined liberal disdain inspires so much more anger than the very real disdain of conservatives who see the poverty of places like eastern Kentucky as a sign of ... personal and moral inadequacy...

One thing is clear, however: Democrats have to figure out why the white working class just voted overwhelmingly against its own economic interests, not pretend that a bit more populism would solve the problem.

Thursday, November 24, 2016

America's working age population is finally growing again: For most of the last two decades, the growth rate of America’s workforce has been declining because baby boomers have been retiring at a faster pace than younger workers are entering the labor force. However, the potential workforce recently began growing again. What impact will this have on the economy? ...

Populists as Snake Oil Sellers: Simon wonders why disenchantment with globalization has caused people to turn to what he calls snake oil salesmen. That phrase is apt, because snake oil salesmen thrived for decades. And some of the reasons they did so might be relevant today.

My source here is a wonderful paper (pdf) by Werner Troesken which describes the massive growth in patent medicines in 19th century America. This suggests to me four points of similarity between snake oil salesmen and populist politicians....

Tuesday, November 22, 2016

Populism and the media: This could be the subtitle of the talk I will be giving later today. I will have more to say in later posts, plus a link to the full text..., but I thought I would make this important point here about why I keep going on about the media. In thinking about Brexit and Trump, talking about the media is not in competition with talking about disenchantment over globalisation and de-industrialisation, but a complement to it. I don’t blame the media for this disenchantment, which is real enough, but for the fact that it is leading people to make choices which are clearly bad for society as a whole, and in many cases will actually make them worse off. They are choices which in an important sense are known to be wrong.

Many will say on reading that last sentence that this is just your opinion, but in a way that illustrates the basic problem. Take Brexit. We know that erecting trade barriers is harmful: the only question is whether in this case it will be pretty harmful or very harmful. Some of this is already in the process of happening, as the depreciation reduces real wages. We also know that erecting barriers against your neighbours is extremely unlikely to be offset in any significant way by doing deals with countries further away. This is knowledge derived largely from empirical evidence and uncontroversial theory and agreed almost unanimously by economists.

The moment you reduce it to just another opinion, to be balanced by opposing opinions, as happened in the broadcast media during the Brexit campaign, you allow that knowledge to be ignored when critical choices are made. ...

Outside Looking In: Why Has Labor Force Participation Increased?: The labor force participation rate (LFPR) is an estimate of the share of the population actively engaged in the labor market. The LFPR has increased about 30 basis points over the past year (from the third quarter of 2015 to the third quarter of 2016)—a modest reversal in the precipitous decline in the LFPR that began in 2008. What accounts for this stabilization and—given the demographic and cyclical forces in play—how much longer can it last?

The following is perspective through the lens of the reasons people give for not participating in the labor force. Perhaps the component most responsive to changes in labor market conditions is what I will refer to as the "shadow labor force," which is made up of people who are not in the official labor force and are not actively seeking employment, but who say they want a job. (This group includes people discouraged over job prospects.) During tough times, the share of the population in the shadows rises, and during good times it falls. In the third quarter of 2016, about 2.3 percent of the population fell into this category—down from a high of 2.8 percent but still a bit above prerecession levels (see the chart).

But focusing solely on the decline in the shadow labor force to explain the recent reversal in the LFPR would be a mistake. In fact, high unemployment in the aftermath of the Great Recession was accompanied not only by a rise in the share of the shadow labor force, but also by an increase in the share of the population who said they didn't currently want a job—because of either a health issue or engagement in some other activity. Although some of this likely reflects trends already at work before the recession, some of it was also probably a cyclical response to weak job opportunities.

The chart below shows how these various factors cumulatively contribute to the decline in the LFPR between the third quarter of 2007 and the third quarter of 2016. It shows that, in addition to a larger share in the shadow labor force, the reasons for the decline between 2007 and 2016 also stemmed from a greater age-adjusted share who were too sick or disabled to work (purple) or in school instead of working (light blue). Interestingly, the share out of the labor force but wanting a job (dark blue) actually exerted the smallest downward force on LFPR of all of these three reasons. The green section represents the impact of the baby boomers: an increasing share of the population of retirement age. Partly offsetting this shift in the age distribution was a decrease in the propensity of these workers to actually retire (orange).

The next chart shows that almost all the nonparticipation factors that had put downward pressure on the LFPR since 2007 have reversed course and contributed positively to an increase in the LFPR during the past year. In particular, there was a decline in the share of the population who cited nonparticipation because of poor health or enrollment in school or were otherwise wanting but not looking for work. This decline in the schooling and illness nonparticipation rates is particularly noteworthy because it stands in contrast to the increasing trends that were in place prior to the recession (to read more, visit our LFP Dynamics page).

The only significant factor continuing to depress the LFPR during the past year is the impact of an increasing share of the population in age groups with relatively low labor force attachment. This factor brings me to the second question I posed earlier in this post: What will this picture look like going forward? Unfortunately, I think the answer is that it's very hard to say.

Other things equal, it seems reasonable to think that the nonparticipation rates attributable to age-adjusted schooling and poor health will eventually revert to the upward trends occurring before the recession, a reversion that will push down the LFPR. Probably the biggest wild card for the future is what will happen with decisions concerning retirement (and hence older individuals' LFPR). The trend toward retiring later in life has risen and fallen a couple of times during the past two decades. The positive role that later retirement has played in mitigating the overall decline in the LFPR in recent years—coupled with the steadily increasing share of the population approaching traditional retirement age—suggests that deferred retirement will be an especially important factor to keep an eye on. This point is nicely illustrated in this piece by our colleagues at the Kansas City Fed, who look at the role of later retirement in reducing the rate of outflow of people from the labor force.

Monday, November 21, 2016

What Size Fiscal Deficits for the United States: The US government can borrow at interest rates very close to zero. Surely the long-term benefits of public investment are greater than zero. Isn’t it obvious that the case for more government borrowing is overwhelming...?

The answer? Not so fast.

True, US government borrowing costs are very low. ...

True, if the economy were operating far below potential, the case for large deficits would then be a very strong one. Surely public investment should be increased and financed by debt under such circumstances. ...

So is it an open and shut case? No.

The US economy is operating close to its potential..., we are close to full employment. ...

This implies that if US policymakers wanted to avoid an overheating economy, greater public spending would have to be offset by a reduction in some component of private spending (which, presumably, would be achieved by an increase in interest rates by the Federal Reserve). To the extent that the reduction came from private investment..., private capital that would be crowded out. Given the poor state of public capital in the United States, the case is still there for an increase in public spending, and a corresponding higher deficit, but it is clearly weaker.

Is there a case for doing more? The answer is a qualified yes.

There is a case for temporarily overheating the US economy. The reason goes under the ugly name of “hysteresis”..., the notion that the long period of low growth and high unemployment has led to some permanent damage, which can be partly undone by a period of overheating of the economy. The most obvious case here is labor force participation... A period of very low unemployment may lead some of them to come back into the labor force. ...

What is the bottom line? There is no case ... for all-out fiscal deficits. But there is a case for a fiscal expansion, based on carefully targeted public investment. Two remarks are needed here. Maintenance of existing infrastructure..., which has been badly neglected, may be less glamorous and less politically attractive than brand-new projects, but it is where the government is likely to get the best bang for its buck. Public-private partnerships, which have been mentioned by the Trump program, may not be the right tool: By aiming at projects that can at least partly pay for themselves financially, they may generate the wrong kind of public investment. Maintenance and the most useful public projects may have high social returns, but they are likely to have low financial returns.

“…almost all of the most prominent economists in the public sphere -- Paul Krugman, Summers, Thomas Piketty, and the rest -- lean to the left, and lean significantly more to the left than in years past. Conservative economists are largely hiding out in academia…”

But like Noah, I am skeptical that this represents a permanent change. ...

But remember that we’re dealing with a president-elect whose business career is one long trail of broken promises and outright scams — someone who just paid $25 million to settle fraud charge... Given that history..., you should probably assume that it’s a scam until proven otherwise.

And we already know enough about his infrastructure plan to suggest, strongly, that it’s basically fraudulent...

The ... Trump team is ... calling for huge tax credits: billions of dollars in checks written to private companies that invest in approved projects, which they would end up owning. ...

There are three questions you should immediately ask.

First, why do it this way? Why not just have the government do the spending..., the eventual burden on taxpayers will be every bit as high if not higher.

Second, how is this scheme supposed to deal with infrastructure needs that can’t be turned into profit centers? Our top priorities should include things like repairing levees and cleaning up hazardous waste; where’s the revenue stream? Maybe the government can promise to pay fees in perpetuity..., but that makes it even clearer that we’re basically engaged in a gratuitous handout to select investors.

Third, what reason do we have to believe that this scheme will generate new investment, as opposed to repackaging things that would have happened anyway? For example, many cities will have to replace their water systems in the years ahead, one way or another; if that replacement takes place under the Trump scheme rather than through ordinary government investment, we haven’t built additional infrastructure, we’ve just privatized what would have been public assets — and the people acquiring those assets will have paid just 18 cents on the dollar, with taxpayers picking up the rest of the tab.

Again, all of this is unnecessary. If you want to build infrastructure, build infrastructure. It’s hard to see any reason for a roundabout, indirect method that would ... provide both the means and the motive for large-scale corruption ... unless the inevitable corruption is a feature, not a bug. ...

Cronyism and self-dealing are going to be the central theme of this administration... And people who value their own reputations should take care to avoid any kind of association with the scams ahead.

Sunday, November 20, 2016

Game Theory in Economics and Beyond, by Larry Samuelson, Journal of Economic Perspectives vol. 30, no. 4, Fall 2016 (pp. 107-30): Abstract Within economics, game theory occupied a rather isolated niche in the 1960s and 1970s. It was pursued by people who were known specifically as game theorists and who did almost nothing but game theory, while other economists had little idea what game theory was. Game theory is now a standard tool in economics. Contributions to game theory are made by economists across the spectrum of fields and interests, and economists regularly combine work in game theory with work in other areas. Students learn the basic techniques of game theory in the first-year graduate theory core. Excitement over game theory in economics has given way to an easy familiarity. This essay first examines this transition, arguing that the initial excitement surrounding game theory has dissipated not because game theory has retreated from its initial bridgehead, but because it has extended its reach throughout economics. Next, it discusses some key challenges for game theory, including the continuing problem of dealing with multiple equilibria, the need to make game theory useful in applications, and the need to better integrate noncooperative and cooperative game theory. Finally it considers the current status and future prospects of game theory.

Saturday, November 19, 2016

Infrastructure Build or Privatization Scam?: Trumpists are touting the idea of a big infrastructure build, and some Democrats are making conciliatory noises about working with the new regime on that front. But remember who you’re dealing with: if you invest anything with this guy, be it money or reputation, you are at great risk of being scammed. So, what do we know about the Trump infrastructure plan, such as it is?

Crucially, it’s not a plan to borrow $1 trillion and spend it on much-needed projects — which would be the straightforward, obvious thing to do. It is, instead, supposed to involve having private investors do the work both of raising money and building the projects — with the aid of a huge tax credit that gives them back 82 percent of the equity they put in. To compensate for the small sliver of additional equity and the interest on their borrowing, the private investors then have to somehow make profits on the assets they end up owning.

You should immediately ask three questions about all of this.

First, why involve private investors at all? ...

One answer might be that this way you avoid incurring additional public debt. But that’s just accounting confusion. ... The government’s future cash flow is no better..., and worse if it strikes a bad deal, say because the investors have political connections.

Second, how is this kind of scheme supposed to finance investment that doesn’t produce a revenue stream? Toll roads are not the main thing we need right now; what about sewage systems, making up for deferred maintenance, and so on? You could bring in private investors by guaranteeing them future government money... But this ... would simply be government borrowing through the back door — with much less transparency, and hence greater opportunities for giveaways to favored interests.

Third, how much of the investment thus financed would actually be investment that wouldn’t have taken place anyway? ... Suppose that there’s a planned tunnel, which is clearly going to be built... In that case we haven’t promoted investment at all, we’ve just in effect privatized a public asset — and given the buyers 82 percent of the purchase price in the form of a tax credit.

Again, all of these questions could be avoided by doing things the straightforward way: if you think we should build more infrastructure, then build more infrastructure, and never mind the complicated private equity/tax credits stuff. You could try to come up with some justification for the complexity of the scheme, but one simple answer would be that it’s not about investment, it’s about ripping off taxpayers. Is that implausible, given who we’re talking about?

Friday, November 18, 2016

The Medicare Killers, by Paul Krugman, NY Times: During the campaign, Donald Trump often promised to ... represent the interests of working-class voters who depend on major government programs. “I’m not going to cut Social Security like every other Republican and I’m not going to cut Medicare or Medicaid,” he declared, under the headline “Why Donald Trump Won’t Touch Your Entitlements.”

It was, of course, a lie. The transition team’s point man on Social Security is a longtime advocate of privatization, and all indications are that the incoming administration is getting ready to kill Medicare, replacing it with vouchers that can be applied to the purchase of private insurance. Oh, and it’s also likely to raise the age of Medicare eligibility. ...

While Medicare is an essential program for a great majority of Americans, it’s especially important for the white working-class voters who supported Mr. Trump most strongly. ... People like Paul Ryan ... have often managed to bamboozle the media into believing that their efforts to dismantle Medicare and other programs are driven by valid economic concerns. They aren’t.

It has been obvious for a long time that Medicare is actually more efficient than private insurance, mainly because it doesn’t spend large sums on overhead and marketing, and, of course, it needn’t make room for profits.

What’s not widely known is that the cost-saving measures included in ... Obamacare, have been remarkably successful in their efforts to ... rein in the long-term rise in Medicare expenses. ... This success is one main reason long-term budget projections have dramatically improved.

So why try to destroy this successful program...? ... It would be very helpful for opponents of government to do away with a program that clearly demonstrates the power of government to improve people’s lives.

And there’s an additional benefit to the right from Medicare privatization: It would create a lot of opportunities for private profits, earned by diverting dollars that could have been used to provide health care. ...

You might think this would make the whole idea a non-starter. And this push will, in fact, fail — just like Social Security privatization in 2005 — if voters realize what’s happening.

What’s crucial now is to make sure that voters do, in fact, realize what’s going on. And this isn’t just a job for politicians. It’s also a chance for the news media, which failed so badly during the campaign, to start doing its job.

Rent or buy? Often I am asked this question, and I find I lack a satisfactory answer. I realize that people who ask me this question are typically in transitional phases in their lives – moving from young adulthood to real adulthood. The answer is perhaps more obvious on either side of that inflection point, less so in the middle of it.

Most buyers do not recognize/plan for depreciation costs. I have heard that you should expect annual depreciation of 2% of the cost of your home. This seems consistent with my experience.

Maintenance and upkeep are time consuming, particularly for single-family housing. Anyone want to come over and rake leaves with me this weekend?

Depending on the market, it can be an illiquid asset. This can be a problem if you plan/need to move. This is especially the case if you buy in a region that is struggling economically.

It is a leveraged asset, which is brutal in a falling market.

I am guessing that commenters will add additional pros and cons.

My standard advice is that property should be a part of your portfolio, but not your entire portfolio. If buying a home leaves you cash poor or unable to save in your firm’s retirement plan, it probably isn’t a good option for you. If you plan to move soon, it probably isn’t a good option. If you are too busy with your career to deal with upkeep, it probably isn’t a good option. Recognize the risk that comes with the reward. If you aren’t ready to accept the risk, it probably isn’t a good option.

I don’t think you should let the recent housing bust play too heavily in your decision. I tend to think that was a fairly unique event. If you are waiting for another housing bust on a similar order of magnitude before you buy, you might be waiting forever.

I have heard the advice that you should buy the most expensive house you can because the burden will fall as your earnings rise. Bad advice, in my opinion. Following this advice will leave you cash poor and unable to meet other financial goals or prepare for a life change or emergency. My advice is to leave substantial margin for error. And buy for the neighborhood, not the house.

My experience as a homeowner has been generally positive, but I would say that my circumstances are somewhat unique. Partly through accident, and then later through design when we recognized the benefits, Mrs. FedWatch and I have always purchased housing that we could afford on just one of our incomes. As a result, we have had to make some housing sacrifices. Not really me so much, mostly for her. She complained the last house was “killing her soul.” That doesn't sound pleasant. And the current house needs some work. But on the upside, however, when Mrs. FedWatch wanted to take time off work, we did not face a financial hardship.

Thursday, November 17, 2016

The Economic Outlook, Before the Joint Economic Committee, U.S. Congress, Washington, D.C., November 17, 2016: ...The U.S. economy has made further progress this year toward the Federal Reserve's dual-mandate objectives of maximum employment and price stability. Job gains averaged 180,000 per month from January through October, a somewhat slower pace than last year but still well above estimates of the pace necessary to absorb new entrants to the labor force. The unemployment rate, which stood at 4.9 percent in October, has held relatively steady since the beginning of the year. The stability of the unemployment rate, combined with above-trend job growth, suggests that the U.S. economy has had a bit more "room to run" than anticipated earlier. ...

While above-trend growth of the labor force and employment cannot continue indefinitely, there nonetheless appears to be scope for some further improvement in the labor market. ... Further employment gains may well help support labor force participation as well as wage gains; indeed, there are some signs that the pace of wage growth has stepped up recently. While the improvements in the labor market over the past year have been widespread across racial and ethnic groups, it is troubling that unemployment rates for African Americans and Hispanics remain higher than for the nation overall, and that the annual income of the median African American household and the median Hispanic household is still well below the median income of other U.S. households.

Meanwhile, U.S. economic growth appears to have picked up from its subdued pace earlier this year. ...

Turning to inflation... Core inflation, which excludes the more volatile energy and food prices and tends to be a better indicator of future overall inflation, has been running closer to 1-3/4 percent.

With regard to the outlook, I expect economic growth to continue at a moderate pace sufficient to generate some further strengthening in labor market conditions and a return of inflation to the Committee's 2 percent objective over the next couple of years. ... As the labor market strengthens further and the transitory influences holding down inflation fade, I expect inflation to rise to 2 percent.

Monetary Policy I will turn now to the implications of recent economic developments and the economic outlook for monetary policy. The stance of monetary policy has supported improvement in the labor market this year, along with a return of inflation toward the FOMC's 2 percent objective. In September, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent and stated that, while the case for an increase in the target range had strengthened, it would, for the time being, wait for further evidence of continued progress toward its objectives.

At our meeting earlier this month, the Committee judged that the case for an increase in the target range had continued to strengthen and that such an increase could well become appropriate relatively soon if incoming data provide some further evidence of continued progress toward the Committee's objectives. This judgment recognized that progress in the labor market has continued and that economic activity has picked up from the modest pace seen in the first half of this year. And inflation, while still below the Committee's 2 percent objective, has increased somewhat since earlier this year. Furthermore, the Committee judged that near-term risks to the outlook were roughly balanced.

Waiting for further evidence does not reflect a lack of confidence in the economy. Rather, with the unemployment rate remaining steady this year despite above-trend job gains, and with inflation continuing to run below its target, the Committee judged that there was somewhat more room for the labor market to improve on a sustainable basis than the Committee had anticipated at the beginning of the year. Nonetheless, the Committee must remain forward looking in setting monetary policy. Were the FOMC to delay increases in the federal funds rate for too long, it could end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of the Committee's longer-run policy goals. Moreover, holding the federal funds rate at its current level for too long could also encourage excessive risk-taking and ultimately undermine financial stability.

The FOMC continues to expect that the evolution of the economy will warrant only gradual increases in the federal funds rate over time to achieve and maintain maximum employment and price stability. This assessment is based on the view that the neutral federal funds rate--meaning the rate that is neither expansionary nor contractionary and keeps the economy operating on an even keel--appears to be currently quite low by historical standards. ... With the federal funds rate currently only somewhat below estimates of the neutral rate, the stance of monetary policy is likely moderately accommodative, which is appropriate to foster further progress toward the FOMC's objectives. But because monetary policy is only moderately accommodative, the risk of falling behind the curve in the near future appears limited, and gradual increases in the federal funds rate will likely be sufficient to get to a neutral policy stance over the next few years.

Of course, the economic outlook is inherently uncertain, and, as always, the appropriate path for the federal funds rate will change in response to changes to the outlook and associated risks.

I have made no secret over the years of my conviction that the sensitivities of individuals or members of various group should not be permitted to chill free speech on college campuses. I have the scars to show for speaking out against overdoing the idea of microaggression, the regulation of Halloween costumes and the prosecution of students for taking part in sombrero parties – all of which have struck me as “political correctness” run amok.

But the events of the last week are giving me pause about that term and its usage and the complex issues underlying it. It’s not that I now think speech codes are wise or that we should stamp out microaggressions wherever they are perceived. Rather, my reaction is to the way the President-elect has been heard during the campaign and the terrifying events his election has set off. ...

Black students, gay students, Hispanic students, Muslim students, disabled students, female students – all of them now fear that the basic security and acceptance on which they relied is at risk. Help lines are flooded with calls. Those who seek to count hateful incidents report an upsurge. I cannot convince myself that that fear is irrational. ...

In the face of all this, the President-elect and his staff ... have allowed, without adequate response and rejection, the celebration of victory to metastasize into something dark and evil. It is surely wrong to hold the President-elect personally responsible for all the words and deeds of all who support him. Equally, the President-elect has a moral obligation to stand up for tolerance and against intolerance whatever its source.

The fight for academic freedom and for ideological diversity on college campuses should and will go on. But given what opposition to “political correctness” has licensed, it time to retire the term.

More importantly, democracy does not mean electrocracy. Winning an election does not entitle one to upend our basic values. The refusal to tolerate blatant racism, bigotry and misogyny are beyond compromise. The first obligation of anyone currently in a leadership position is not to find common ground with our new President-elect now that the ballots have been counted and the election is over. It is instead to once again make it possible for all who live in our country to feel safe.

There are two productivity puzzles: Much has been written about the productivity puzzle. But there are actually two puzzles apparent in the data – one in the level that hit at the crisis and the other in the growth rate, which is a more recent phenomenon – and they could be driven by completely different sources. Distinguishing between the two puzzles is important precisely because of these potential differences – if anyone analyses the puzzle as a whole looking for the force driving it, the actual underlying variety will confound our estimates of the relative importance of these drivers.

In this post I discuss:

what people mean by the productivity puzzle, usually a percent deviation from the pre-crisis trend;

how I think of it as actually two puzzles: one in the level and the other in the growth rate;

and why this distinction can be important, using the example of a simple growth accounting decomposition of productivity growth into capital deepening and technological advancement.

Wednesday, November 16, 2016

CBO Report Confirms What We Already Knew: In May, the Department of Labor published a final rule that will extend critical overtime protections to millions of workers. The rule updates the salary threshold below which most salaried workers are overtime eligible (and above which they may be exempt from overtime depending on their duties). ...

Yesterday, the Congressional Budget Office released a study of the economic impact of reversing these updates to the overtime regulations and taking away these important protections. The CBO report confirms what we already knew – that the rule will increase earnings for middle-income Americans.

Here are our takeaways from the report:

...reversing the rule would strip nearly 4 million workers of overtime protections. ...

...reversing the rule would reduce workers’ earnings while increasing the hours they work. ...

At a time when income inequality is already of great concern, CBO finds that reversing the rule would primarily benefit people with high incomes. ...

...reversing the rule would not create or save jobs. ...

...an important indirect benefit of the update to the overtime regulations that would be lost if it were reversed: strengthened overtime protections for overtime-eligible workers earning between the old and new salary threshold. ...

CBO likely overestimates the amount of money businesses would save if the rule were reversed. ...

CBO does not mention key benefits of the update to the overtime regulations that would be lost if it were reversed. ...

CBO believes that a substantial part of the savings to employers arising from reversing the update to the overtime regulations will be passed on to consumers in the form of lower prices. ... Given the range of uncertainty in these estimates, while it is clear that real family incomes would increase for the highest income Americans, it is less clear that family income for other groups would change significantly — except for those households with workers directly affected by loss of overtime coverage, whose incomes would fall.

The bottom line is that today’s report confirms what we already knew: the overtime rule restores the promise that a long day’s work should be rewarded with fair pay. At a time when income inequality is already of great concern, the report also concludes that reversing the rule would primarily benefit people with high incomes. ...

The tragedy is that Trump’s program will only strengthen the trend towards inequality. ..

The main lesson for Europe and the world is clear: as a matter of urgency, globalization must be fundamentally re-oriented. The main challenges of our times are the rise in inequality and global warming. We must therefore implement international treaties enabling us to respond to these challenges and to promote a model for fair and sustainable development. ...

There should be no more signing of international agreements that reduce customs duties and other commercial barriers without including quantified and binding measures to combat fiscal and climate dumping in those same treaties. For example, there could be common minimum rates of corporation tax and targets for carbon emissions which can be verified and sanctioned. It is no longer possible to negotiate trade treaties for free trade with nothing in exchange. ...

It is time to change the political discourse on globalization: trade is a good thing, but fair and sustainable development also demands public services, infrastructure, health and education systems. In turn, these themselves demand fair taxation systems. If we fail to deliver these, Trumpism will prevail.

We can hold onto old ideas, inflated promises about the benefits of globalization and international trade for example, while charlatans such as Donald Trump take advantage of the fears people have to divide us through racism and xenophobia that miscasts the blame for our economic woes. Or we can recognize that change and new ways of thinking are needed and lead the way to policies that move us toward a more equitable economic system.

FRBSF Fed Views: Rhys Bidder, economist at the Federal Reserve Bank of San Francisco, stated his views on the current economy and the outlook as of November 10, 2016.

Real GDP grew at an annualized rate of 2.9% in the third quarter, a significant improvement over the average growth of 1.1 % during the first half of the year. Even though consumption growth has eased from its earlier rapid pace, strong net exports and a turnaround in inventory accumulation have boosted real GDP growth.

As some of the recent strength in net exports is likely to be transitory and investment and manufacturing performance continues to be sluggish, we expect real GDP growth to soften somewhat in the fourth quarter. However, annualized growth in the second half of the year should exceed 2% based on solid consumption growth in the near-to-medium term underpinned by strong fundamentals, such as continued strength in the labor market. Going into 2017 and beyond, we expect the pace of growth to slow somewhat to its long-run trend of a little over 1 ½%.

The October labor market report indicated a still solid labor market with nonfarm payroll employment increasing by 161,000 jobs in October, while previous months’ data were revised upwards. Monthly payroll gains have averaged 179,000 per month over the past six months.

The unemployment rate declined slightly, from 5.0% to 4.9% in October, and remains close to our estimate of the natural rate of unemployment, currently 5.0%. This decline was accompanied by falls in broader measures of labor market slack that include marginally attached workers and those who work part-time but would prefer to have full-time jobs. With the economy growing somewhat above trend and employment growth remaining healthy, we expect the unemployment rate to decline modestly in the near-term, before returning to its natural level.

Inflation remains below the Fed’s 2% target, although it has picked up somewhat. Headline inflation, captured by the 12-month percent change in the personal consumption expenditures (PCE) price index was 1.2% in September which is the highest reading reported since late 2014, partly reflecting a rebound in energy prices. Core inflation, which removes the direct influence of the volatile energy and food price components of inflation, remained at 1.7% in September, the same rate reported for August. As the labor market tightens further and the lingering effects of past dollar appreciation and oil price declines subside, we expect both core and headline inflation to rise gradually towards 2%.

Treasury yields and other long-term rates have remained low since the Fed raised its funds rate target range at the end of 2015. These low rates appear to reflect market expectations that the pace of any further policy tightening will be gradual and that the natural rate of interest is lower as a result of lower trend GDP growth, which in turn partly reflects lower expectations for productivity growth and slower trend growth in the labor force.

Labor force growth depends on growth in the working age population as well as the labor market participation rate, which measures the fraction of the working aged who are working or seeking work. The growth rate in the population has slowed over the post-war period and in recent decades the labor force participation rate has declined substantially.

The recent decline in the labor force participation rate partly reflects cyclical factors associated with the recent recession. However, the principal driver of its trend decline is the effect of an aging population. Since participation is relatively high among the young and prime-aged and substantially lower among older groups, the overall participation rate declines as the older groups represent a larger share of the population. This process will continue in coming years as more baby boomers reach retirement age.

The growth of the labor force determines how many jobs need to be created to maintain full employment. Intuitively, the more people there are who want to work, the more jobs are needed to absorb them into the ranks of the employed. Calculations of trend labor force growth allow an estimate of the pace of employment growth consistent with a healthy labor market at full employment. In the 1990s, this number appears to have been of the order of 150,000 job gains per month. However, due to the aforementioned demographic changes, the “new normal” or “trend” employment growth is now estimated to be approximately 80,000. Alternative assumptions about future participation rates imply estimates varying between 50,000 and 100,000 jobs per month.

These estimates suggest that even if employment growth declines substantially from its current pace of 161,000 jobs to less than 100,000 per month, such a decline is still consistent with a healthy labor market where unemployment is close to its natural rate.

The views expressed are those of the author, with input from the forecasting staff of the Federal Reserve Bank of San Francisco. They are not intended to represent the views of others within the Bank or within the Federal Reserve System.

Jefferson, like most of his founding-father contemporaries, was steeped in one version of classical history: Roman history as a morality play. Jefferson and many, many of his revolutionary peers assumed that yeoman farmers--Cincinnati--were the only possible social class that could maintain a free republic. They all believed that Rome was a great, free Republic because of its fiercely-independent farmers who nevertheless loved their city and would--like Cincinnatus--drop their ploughs and instantly take up their swords to defend (and conquer), and then return to their ploughs after the war was over.

The history that he and his peers had been taught was that the two centuries around the start of the Christian era saw the transformation of Rome from a virtuous farmer's republic into an unequal, commercial, corrupt, imperial city of plutocrats and proletarians. The wealth of conquest corrupted the Republic, so their teachers taught them, transforming Italy into a land of plutocrats, moneylenders, slaves, and driving the former self-sufficient yeomen off their land into the city. There they subsisted on bread and circuses and became proletarians--the Roman mob which was such easy prey to demagogues. Thus the virtuous city of Rome degenerated into the unequal, commercial, corrupt, imperial city of proletarians and plutocrats over which demagogues and then demagogues fought.

The Emperor Augustus stabilized the situation at the price of the Romans' liberty, but only for a while. Afterwards the best that could be hoped for was the benevolent rule of a wise autocratic emperor. And after a run of five--Nerva, Trajan, Hadrian, Antonius Pius, and Marcus Aurelius--Rome's luck ran out.

Jefferson and his followers saw the transformation of London into an unequal, commercial, corrupt, imperial city as a similar threat to British liberty. Indeed, what they saw as the threat of the spread of imperial corruption from London across the Atlantic was one of the reasons that they made the American Revolution.

Republican virtue was to be found only in the countryside, where people worked hard and wrested their living from the soil. But Jefferson did not set his hand to the plough. And his family’s plantations were arenas of vice and domination to a degree that far surpass the corrupt London of George III Hanover. Jefferson did, however, free those of his slaves who were descended from himself.

Making this historical morality play very real indeed to Jefferson's generation was their firm belief that eighteenth-century Britain was repeating Roman history. Eighteenth-century Londoners saw their civilization as in an "Augustan Age"--and the rebel American colonists saw that as no good thing. That is why they rebelled. Rebel colonial grievances up to 1775 were not because the tyranny of London was then so burdensome--stamp taxes, tea imports, arbitrary royal governors, continental-system trade restrictions, and even the closing of Boston's port were not intolerable, but the precedent that Americans were not citizens but subjects was intolerable in the context of what they saw as Britain's steps along the road of imperial destiny. And after the Revolution was won, one of Jefferson's highest priorities was to keep the cycle of urban-imperial corruption and subsequent loss of liberty from happening again by making sure that Philadelphia and New York did not become Rome. In the eyes of Jefferson and company, Republican virtue was to be found only in the countryside, where people worked hard and wrested their living from the soil.

And while imperial Britain’s rule was a bad thing in Jefferson's view, the agrarian economy that imperial Britain’s mercantilist policies had gardened its North American colonies into was a good thing because it kept Americans close to the soil, and hence virtuous.

The Jeffersonian current in American politics was indeed strong. A generation after Jefferson, the president was Andrew Jackson. Andrew Jackson's enemies were: Amerindians, bankers, corrupt government contractors, and anyone who favored literacy or property tests that kept the vote from the (white, male) rural adults with their hunting rifles whom Jackson as president believed had come down the Mississippi at the end of 1814 and so enabled him to win the Battle of New Orleans. A Jefferson-Jackson United States would have been rural, Anglo-Saxon, Southern and Border-Southern, and not a technological-leader but rather a technological-follower nation.

What would have been the long-term consequences if America had not taken the Hamiltonian turn? What would the world in 1900 have looked like if the United States had focused on specializing in its comparative advantage of resource-intensive products and bought most of its manufactures from Britain and Europe?

I am among those who think this is a bad idea. This isn’t the right time to signal that China’s long-standing exchange rate management has crossed over the line and become manipulation. If China responded by ending all exchange rate management—no daily fix, no band, no intervention, a true float—the renminbi would certainly fall, and potentially fall by a lot.

Uncomfortable as it is to say, right now it is in the United States’ economic interest for China to continue to manage its exchange rate. ...

I guess you could argue that that China’s reserves sale have been persistent and one-sided, and thus fit the letter of law. But China has sold foreign exchange in the market to keep the yuan from depreciating. The monthly data suggest has China not bought foreign exchange in the market to keep the yuan from appreciating in the past 6 quarters or so... Its intervention in the market has worked to prevent exchange rate moves that would have the effect of widening China’s current account surplus over time. Every indicator of intervention that I track is telling the same story.

I can see how a case could be made that China’s broader exchange rate management—notably its use of the fix to guide the CNY—could meet the 1988 law’s definition of manipulation. ... I have consistently argued that China’s currency is still tightly managed. ...

But that doesn’t mean naming China is a good thing to do right now. ...

The goal of the United States right now, in my view, should be to encourage China to manage its currency in a way that doesn’t give rise to strong expectations of further depreciation that could fuel potentially unmanageable outflows—while encouraging China to put in place the bank recapitalization and social safety net needed to more permanently wean China off external demand. ...

Why interest rates will likely rise faster than inflation: Is higher inflation just around the corner? That seems to be how the bond market sees it: As soon as traders heard Donald Trump had won the presidency, bond yields spiked (chart below). That’s because it’s widely assumed that inflation and interest rates will be higher under Trump than they would have been under Democrat Hillary Clinton.

There are two reasons to expect higher interest rates and rising inflationary pressure with Trump rather than Clinton as president...

An FRBSF Economic Letter from Canyon Bosler and Nicolas Petrosky-Nadeau:

Job-to-Job Transitions in an Evolving Labor Market: Job mobility—the ability of workers to move easily from one job to another—is commonly linked with economic opportunity. High job mobility in the United States has long been regarded as an advantageous feature. A fluid labor market serves as an important engine of economic and social mobility by enabling workers to change jobs for higher compensation, better work conditions, and opportunities for advancement. However, the aggregate rate at which people leave one job for another has been falling for almost two decades. Some analysts suggest this may be a sign that the labor market has lost some of its dynamism.

In this Economic Letter we explore the sources of this decline in the job-to-job transition rate. We find that a pronounced decline in the job switching behavior of young workers ages 16 to 24 since the late 1990s explains most of the overall decline in job-to-job transition rates. The labor market is as dynamic today as it was 20 years ago for workers ages 25 years and over.

Declining dynamism

People are constantly moving in and out of jobs. More people move from one job to another in a given month than move from unemployment into a new job. Job-to-job flows generally reflect the natural process of people shifting around to find the best job for their skill sets. In the process, these workers often secure higher wages, experiment with different jobs, and develop new skills. The fluidity of the U.S. labor market is envied by many economies around the world. However, as with other measures of dynamism, declining job-changing activity in the United States has raised concerns that the engine of opportunity is stalling (Davis and Haltiwanger 2014). Between 1997 and 2013, the most recent year of data available from the Census Bureau’s Survey of Income and Program Participation (SIPP), the rate at which people move out of one job and into another has declined just over 25%. In a typical month in 1997, nearly 3% of people over age 16 who were employed in one month had moved to a different job by the next month. By 2013 this had dropped to near 2% (see Figure 1 and Moscarini and Thomsson 2007).

Figure 1 Overall job-to-job transition rate has declined

Source: Survey of Income and Program Participation (SIPP) and authors’ calculations. Gray bars represent NBER recession dates. Line breaks show periods with missing data.

The decline has been gradual since 1997 and appears to be part of a secular trend distinct from the ups and downs of business cycles. That said, job-to-job transitions tend to move in accord with the business cycle. Expansions, for instance, tend to coincide with more job-to-job transitions. This is particularly evident during the strong expansion of 2004–07, which led to a temporary reversal of the downward drift. People changed jobs more frequently during the housing boom, reflecting greater economic opportunities, but this acceleration came to an end with the onset of the Great Recession. More recently, as the labor market has strengthened in general, there has been a modest pickup in job-to-job transitions.

Job-to-job transitions: The life cycle and over time

The reasons for and benefits from mobility change over a person’s life. Early in life, the mobility of a fluid labor market allows people to experiment and discover their skills and desired careers (Gervais et al. 2016). Later in life, when people are more established in their careers, mobility reflects the opportunity to find better employment and wage gains or to develop new skills at different tasks. Job-to-job transitions occur more frequently earlier in life. They are highest under the age of 22, then decline rapidly over the remainder of the 20s before stabilizing in the 30s and over the rest of a person’s work life.

Comparing the two lines in Figure 2 reveals a striking drop in the job-to-job movement of young workers between 1997 and 2012. The mobility rates for workers under age 21 dropped about 2 percentage points, from about 6% to about 4%. This stands in stark contrast to the stability in job-to-job mobility for people over age 30. The rate among people ages 40 to 44, for instance, was 1.9% in 1997 and 1.7% in 2012. By this measure, mobility is essentially unchanged since 1997 for a large majority of the workforce.

Figure 2 Job-to-job transition rates decline with age

Source: SIPP and authors’ calculations.

We consider an alternative scenario that holds job-to-job rates for all age groups constant at their 1997 levels, and calculate what the overall rate would have been through 2013 relative to the actual rates. In the alternative scenario, actual rates of employment for each demographic group follow the historical experience, and only job-to-job mobility is held fixed. In particular, young workers in this scenario retain their high rates of job-to-job transitions from 1997 through 2013. This scenario suggests that the overall job-to-job transition rate would have been 2.4% in 2013, instead of the actual 2% rate. This underscores the fact that mobility, by this measure, has not changed significantly for workers over the age of 25.

The pronounced change in the job switching behavior of the young has had a significant impact on the overall decline. Even though individuals under age 25 represent only about 12% of the continuously employed, their diminished job-to-job transition rates account for 70% of the decline in the aggregate job-to-job transitions rate. This observation is clearer when we separate the population into two age groups, workers under age 25 and those 25 and older. Figure 3 reports the job-to-job transition rates for these two groups. It shows that much of the movement has been among younger workers (blue line), while the transition rate for the older group of workers (red line) shows no downward trend.

To gain some insight into the reasons for the declining job-to-job transition rates among young workers, Figure 4 breaks the under-25 group into rates for different occupation groups: services (red line), clerical and retail sales (green line), managerial and professional sectors including technicians, finance, and public safety (yellow line), and sectors such as transportation, construction, mechanics, mining, and farm work (blue line). Together, these sectors represented 95% of employment of the young in 2013. The main finding in the figure is that the decline in job mobility is prevalent across all occupations. It’s also apparent that the dispersion in the job-to-job rates across occupations in 1997 is no longer present by 2013.

Figure 4 Decline for the young similar across occupations

Source: SIPP and authors’ calculations.

The decline in services (red line) appears to be the most pronounced. The rate of job-to-job transitions in 1997 was 5.5%. By 2013 it had declined to 3.5%. Nonetheless, job-to-job transitions in services were more frequent than in other sectors during this entire time period. Services provide a large and increasing share of employment for the young, growing from 23% of jobs in 1997 to 31% in 2013. This growth in share offsets some of the sector’s decline in transitions such that, on net, service occupations do not explain much of the overall decline in job-to-job transition rates for young workers. Of the other broad occupation groups reported in Figure 4, the transportation and construction sectors (blue line) contribute the most to the decline in job-to-job transition rates among young workers. The sector saw a large drop in employment of young workers over this period, and those remaining in the sector experience fewer job-to-job changes than in the past.

Possible explanations and consequences for the U.S. economy

Interpreting the decline in job mobility among the young and its implications for the future of the U.S. economy depends on the underlying explanations for this trend. We can only speculate at this stage. Some of the potential explanations raise concerns. For example, there has been a rising trend of young adults moving back home in recent years (Kaplan 2012). Whether this is a socially desirable development is unclear. While children gain some insurance against the rocky first years in the labor market by moving in with their parents, this may be at the cost of diminished experimentation with different jobs. Another concern is that technological changes that eliminate middle-level skilled jobs also eliminate opportunities for the young to develop and advance in their careers.

On the other hand, the decline in job mobility may be the result of improvements in the labor market rather than a symptom of deterioration. In a maturing economy, workers engage in longer periods of training and greater specialization. This could explain, in part, the trends we observe among young workers. As people earn advanced degrees, they are more likely to move directly into their career of choice and require less job experimentation. The probability of ending a job declines with tenure (Farber 1999). Thus, if young workers find the right job more quickly and stay in their positions longer, they may no longer experience as many job changes early in life. Finally, improved information technologies, such as job search and the screening of applications, have changed how people look for jobs (Stevenson 2009, Faber and Kudlyak 2016) and may have enabled better careers matches (Kuhn and Mansour 2014).

All in all, regardless of the decline in job-to-job mobility for younger workers, the continued fluidity of the labor market for the vast majority of the working population alleviates many of the concerns for the future functioning of the U.S. labor market.

Canyon Bosler is a graduate student at the University of Michigan and a former research associate at the Federal Reserve Bank of San Francisco.

Nicolas Petrosky-Nadeau is a research advisor in the Economic Research Department of the Federal Reserve Bank of San Francisco.

Opinions expressed in FRBSF Economic Letter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco or of the Board of Governors of the Federal Reserve System.